Imagine you are a farmer and you have saved your money to buy a piece of land to begin your farming business. You must decide what you will produce to make money. First you think of crops such as corn, wheat, tomatoes, maybe even tobacco, but then you think about your friend Joe who spent weeks plowing the fields and sowing seeds. Joe Spent months praying for good weather in hopes that his investment would yield a good return. Fortunately for Joe his crop did produce but then he had a short window to sell before it all spoiled and became worthless. You think to yourself that seems like way to much work and way to much risk.
The next day your wife comes home from the market and is complaining about how high the price of milk is, that’s when it hits you. You will be a cattle farmer!!! After all cattle produce milk every day and better yet your friend Bob is a butcher, who would love to buy cattle from you to sell in his shop. So you save enough money to buy 2 cows and excitedly wait for them to produce milk. Unfortunately you soon realize that two cows won’t produce enough milk to cover your expenses, so you think I need more cows!!!
After saving for a couple months you have enough to buy another cow but on your way to the market you have an idea, “What if I bought a bull and let him make me more cows?” That’s it you say, I’ll buy a bull and let them make me more cows while I spend my time working on something else. So you buy the biggest and best looking bull you can find. It’s a year later and your 2 cows and 1 bull have become 4 cows and 1 bull, but better yet your income from milk has doubled!!! With Zero extra investment you have increased your net worth in cattle and doubled your passive income.
Since you are working and aren’t dependent on the milk revenue for income you decide to just keep re-investing it back into purchasing more cattle. So now at year three you have 5 cows and 1 bull that all reproduce and you end up with 9 cows and 2 bulls. This is amazing the cows keep compounding on each other and your income from milk increases each year with no extra work from you, only a small fee to the neighbor’s son to milk and feed to cattle. This year over year compounding continues until you have more cattle than you can imagine and the income from the sale of milk has far exceeded your regular income. It’s at this point you realize you no longer need to work, you can retire and live off of your milk sales. What’s even better is you can sell a couple cows every year to your buddy Bob the butcher for even extra income to travel. With so many cattle constantly reproducing even if you sell a few each year, you will still end every year with more than you started with and your milk income will still continue to grow!!!! Poor old Joe who had some good years with his crops but also had some years where everything got wiped out is still breaking his back plowing fields and planting seeds, hoping for one big pay day to be able to retire. Unfortunately for Joe he pays tax on all of his crops every year as he sells them to have income but you only paid tax on your milk sales, not on the cows that kept multiplying and increasing your net worth and passive income. This allowed you to grow your wealth much faster than Joe and while joe had some great years where he was able to buy new fancy tractors, you slowly but surely kept increasing your worth.
So what does this have to do with money and investing? Well you being the cattle farmer was like someone who slowly invest in income producing assets like stocks that pay dividends. It’s slow at first but eventually if you elect to reinvest those dividends, they begin to grow and purchase even more shares, that produce even more income, and so on and so on. Just like the cattle eventually you will have thousands of shares paying passive income, that continues to buy more shares and if you do this in a non-taxable account like an IRA, that dividend income isn’t taxed so it grows and compounds tax free.
The key is to START!!!!!! The earlier you begin saving and investing, the longer your money has to grow and compound. Even if you can only save a little each month, that is better than nothing and each dollar saved is one step closer to your goal.
Thanks for reading and remember FIRE University is not a licensed financial advisor or a certified tax professional. Everyone should seek professional help before making any financial decisions.